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Volatile Returns: Commodity Investing Through Miners and Explorers

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Volatile Returns: Commodity Investing Through Miners and Explorers

Volatile Returns: Commodity Investing Through Miners

Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.

Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.

Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.

Capitalizing on Volatility: Timing Matters

Just like most investments, timing matters with commodities.

Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.

Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.

Three Ways to Invest in Commodities

There are three primary routes investors can take when it comes to investing in commodities.

Investment MethodBenefitsLimitations
Direct physical investment
  • Purest form of exposure

  • Intrinsic value of a commodity and physical possession
  • High transaction costs (buying, shipping, transport)

  • Costs of physical storage limit the quantity and returns
Commodity futures
  • Commodity investment without the need for storage

  • Diversification benefits and inflation hedge
  • Complex and frequent transactions

  • Risk of contango—when futures contracts are more expensive than the underlying commodity
Commodity-related equities
  • Exposure to prices without storage or transaction limitations

  • Opportunity to benefit from commodity prices and company performance
  • Returns depend on the company’s valuation

  • Companies may mitigate risk by producing multiple commodities—reducing leverage to prices

Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.

The Fundamentals of Investing in Mining Equities

When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.

As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:

CategoryRising Commodity PricesFalling Commodity Prices
Outlook- Improved outlook- Deteriorated outlook
Stock Price Movement- Equity growth- Equity decline
Dividend Payouts- Increased dividends- Decreased dividends
Financial Performance- Increased earnings- Decreased earnings

With the right timing, these ups and downs can create explosive opportunities.

Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.

But how?

The Proof: How Mining Equities React to Metal Prices

Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.

That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.

Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.

All figures are in U.S. dollars unless otherwise stated.

Mining CompanyCompany StagePrimary Metal
Produced
Market Cap.
Oct 31, 2019
Market Cap.
July 29, 2020
Bull Market Performance
(Nov. 1, 2019-July 29, 2020)
Bear Market Performance
(Jan 02 – Dec 31, 2018)
Banyan GoldExploration/
Development
Gold$6M$40M500%-44%
Renforth ResourcesExplorationGold$8M$10M11%-10%
Auryn ResourcesExplorationGold, Copper$181M$330M60%-39%
Wesdome Gold Mines Ltd.ProductionGold$1,104M$1,885M68%110%
Monarch GoldExploration/
Development
Gold$57M$148M139%-23%
Red Pine ExplorationExplorationGold$13M$22M29%-55%
Revival Gold Inc.Exploration/
Development
Gold$27M$74M113%5%
Erdene Resource DevelopmentExploration/
Development
Gold$36M$111M222%-56%
Endeavor Mining Corp.ProductionGold$2,622M$5,874M54%-13%
Yamana Gold IncProductionGold$4,572M$8,279M87%-22%

During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.

In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.

  • Average returns for gold producers including Wesdome: 24.83%
  • Average returns for gold producers excluding Wesdome: -17.65%

During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.

Silver: Bears vs Bulls

Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:

CompanyCompany StagePrimary Metal
Produced
Market Cap.
Oct 31, 2019
Market Cap.
July 29, 2020
Bull Market Performance (Nov. 1, 2019-July 29, 2020)Bear Market Performance (Jan 02 – Dec 31, 2018)
Silvercrest MetalsExplorationSilver$694M$1,449M78%117%
Pan American SilverProductionSilver$2,973M$10,550M125%1%
Golden MineralsExplorationSilver$30M$80M80%-42%
Americas Gold and SilverProductionSilver$335M$482M10%-56%
Dolly Varden Silver Corp.ExplorationSilver$28M$74M152%-32%
Endeavour SilverProductionSilver, Gold$458M$837M72%-10%

During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.

However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.

  • Average returns for silver exploration companies including SilverCrest: 8.32%
  • Average returns for silver exploration companies excluding SilverCrest: -27.86%

On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.

  • Average returns for silver producers: 69.04%
  • Average returns for silver exploration companies: 95.36%

The potential to generate massive returns and losses is evident in both cases for gold and silver.

The Investment Potential of Exploration

Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.

For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.

To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.

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Copper

Mapped: Solar Power by Country in 2021

In 2020, solar power saw its largest-ever annual capacity expansion at 127 gigawatts. Here’s a snapshot of solar power capacity by country.

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Solar Power by Country

Mapped: Solar Power by Country in 2021

This was originally posted on Elements. Sign up to the free mailing list to get beautiful visualizations on natural resource megatrends in your email every week.

The world is adopting renewable energy at an unprecedented pace, and solar power is the energy source leading the way.

Despite a 4.5% fall in global energy demand in 2020, renewable energy technologies showed promising progress. While the growth in renewables was strong across the board, solar power led from the front with 127 gigawatts installed in 2020, its largest-ever annual capacity expansion.

The above infographic uses data from the International Renewable Energy Agency (IRENA) to map solar power capacity by country in 2021. This includes both solar photovoltaic (PV) and concentrated solar power capacity.

The Solar Power Leaderboard

From the Americas to Oceania, countries in virtually every continent (except Antarctica) added more solar to their mix last year. Here’s a snapshot of solar power capacity by country at the beginning of 2021:

CountryInstalled capacity, megawattsWatts* per capita% of world total
China 🇨🇳 254,35514735.6%
U.S. 🇺🇸 75,57223110.6%
Japan 🇯🇵 67,0004989.4%
Germany 🇩🇪 53,7835937.5%
India 🇮🇳 39,211325.5%
Italy 🇮🇹 21,6003453.0%
Australia 🇦🇺 17,6276372.5%
Vietnam 🇻🇳 16,504602.3%
South Korea 🇰🇷 14,5752172.0%
Spain 🇪🇸 14,0891862.0%
United Kingdom 🇬🇧 13,5632001.9%
France 🇫🇷 11,7331481.6%
Netherlands 🇳🇱 10,2133961.4%
Brazil 🇧🇷 7,881221.1%
Turkey 🇹🇷 6,668730.9%
South Africa 🇿🇦 5,990440.8%
Taiwan 🇹🇼 5,8171720.8%
Belgium 🇧🇪 5,6463940.8%
Mexico 🇲🇽 5,644350.8%
Ukraine 🇺🇦 5,3601140.8%
Poland 🇵🇱 3,936340.6%
Canada 🇨🇦 3,325880.5%
Greece 🇬🇷 3,2472580.5%
Chile 🇨🇱 3,2051420.4%
Switzerland 🇨🇭 3,1182950.4%
Thailand 🇹🇭 2,988430.4%
United Arab Emirates 🇦🇪 2,5391850.4%
Austria 🇦🇹 2,2201780.3%
Czech Republic 🇨🇿 2,0731940.3%
Hungary 🇭🇺 1,9531310.3%
Egypt 🇪🇬 1,694170.2%
Malaysia 🇲🇾 1,493280.2%
Israel 🇮🇱 1,4391340.2%
Russia 🇷🇺 1,42870.2%
Sweden 🇸🇪 1,417630.2%
Romania 🇷🇴 1,387710.2%
Jordan 🇯🇴 1,3591000.2%
Denmark 🇩🇰 1,3001860.2%
Bulgaria 🇧🇬 1,0731520.2%
Philippines 🇵🇭 1,04890.1%
Portugal 🇵🇹 1,025810.1%
Argentina 🇦🇷 764170.1%
Pakistan 🇵🇰 73760.1%
Morocco 🇲🇦 73460.1%
Slovakia 🇸🇰 593870.1%
Honduras 🇭🇳 514530.1%
Algeria 🇩🇿 448100.1%
El Salvador 🇸🇻 429660.1%
Iran 🇮🇷 41450.1%
Saudi Arabia 🇸🇦 409120.1%
Finland 🇫🇮 391390.1%
Dominican Republic 🇩🇴 370340.1%
Peru 🇵🇪 331100.05%
Singapore 🇸🇬 329450.05%
Bangladesh 🇧🇩 30120.04%
Slovenia 🇸🇮 2671280.04%
Uruguay 🇺🇾 256740.04%
Yemen 🇾🇪 25380.04%
Iraq 🇮🇶 21650.03%
Cambodia 🇰🇭 208120.03%
Cyprus 🇨🇾 2001470.03%
Panama 🇵🇦 198460.03%
Luxembourg 🇱🇺 1952440.03%
Malta 🇲🇹 1843120.03%
Indonesia 🇮🇩 17210.02%
Cuba 🇨🇺 163140.02%
Belarus 🇧🇾 159170.02%
Senegal 🇸🇳 15580.02%
Norway 🇳🇴 152170.02%
Lithuania 🇱🇹 148370.02%
Namibia 🇳🇦 145550.02%
New Zealand 🇳🇿 142290.02%
Estonia 🇪🇪 130980.02%
Bolivia 🇧🇴 120100.02%
Oman 🇴🇲 109210.02%
Colombia 🇨🇴 10720.01%
Kenya 🇰🇪 10620.01%
Guatemala 🇬🇹10160.01%
Croatia 🇭🇷 85170.01%
World total 🌎 713,97083100.0%

*1 megawatt = 1,000,000 watts.

China is the undisputed leader in solar installations, with over 35% of global capacity. What’s more, the country is showing no signs of slowing down. It has the world’s largest wind and solar project in the pipeline, which could add another 400,000MW to its clean energy capacity.

Following China from afar is the U.S., which recently surpassed 100,000MW of solar power capacity after installing another 50,000MW in the first three months of 2021. Annual solar growth in the U.S. has averaged an impressive 42% over the last decade. Policies like the solar investment tax credit, which offers a 26% tax credit on residential and commercial solar systems, have helped propel the industry forward.

Although Australia hosts a fraction of China’s solar capacity, it tops the per capita rankings due to its relatively low population of 26 million people. The Australian continent receives the highest amount of solar radiation of any continent, and over 30% of Australian households now have rooftop solar PV systems.

China: The Solar Champion

In 2020, President Xi Jinping stated that China aims to be carbon neutral by 2060, and the country is taking steps to get there.

China is a leader in the solar industry, and it seems to have cracked the code for the entire solar supply chain. In 2019, Chinese firms produced 66% of the world’s polysilicon, the initial building block of silicon-based photovoltaic (PV) panels. Furthermore, more than three-quarters of solar cells came from China, along with 72% of the world’s PV panels.

With that said, it’s no surprise that 5 of the world’s 10 largest solar parks are in China, and it will likely continue to build more as it transitions to carbon neutrality.

What’s Driving the Rush for Solar Power?

The energy transition is a major factor in the rise of renewables, but solar’s growth is partly due to how cheap it has become over time. Solar energy costs have fallen exponentially over the last decade, and it’s now the cheapest source of new energy generation.

Since 2010, the cost of solar power has seen a 85% decrease, down from $0.28 to $0.04 per kWh. According to MIT researchers, economies of scale have been the single-largest factor in continuing the cost decline for the last decade. In other words, as the world installed and made more solar panels, production became cheaper and more efficient.

This year, solar costs are rising due to supply chain issues, but the rise is likely to be temporary as bottlenecks resolve.

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